With everything, literally everything, crashing, traders (at least of the bullish persuasion) have one final hope: that either the Fed or the government will step in and - as has happened every time after even a modest correction in the past decade - bail them out.
Goldman is no different, and as the bank's US economist David Mericle writes, here are some of the monetary and fiscal stimuli the government can pursue as soon as this morning, together with some considerations:
- Expect the Fed to ease in March and April, but only have 100bp to go
- Forward guidance (once cut to zero), but will have limited impact given where rates are
- Start asset purchase programme (but can’t buy corporate debt)
Bottom line: Goldman thinks impact of monetary easing from here is between 50% and 75% of medium past recessions
Need to address 3 issues:
- Lost aggregate demand - Income tax cuts, payroll cut, policies to keep local governments spending
- Lost jobs – Extend unemployment and under-employment insurance (as per GFC).
- Cash shortage – Re-allow carry back of operating losses. Increase funding for small business lending. Direct aid or loans to airlines.
Goldman also notes that in 2008 congress passed a stimulus package despite a divided government.
* * *
In a separate note published shortly after, Goldman's chief economist, Jan Hatzius disclosed his own updated views on the shape of "The Policy Response", in which he ominously notes that while "monetary policy is probably not particularly effective at the moment" he expects a 50bps cut in March "in part because the bond market is already priced for a large move and the FOMC will likely be reluctant to risk further tightening in financial conditions by refusing to deliver." He is also "penciling in a final 50bp cut at the April 28-29 meeting" even as he writes that fiscal policy is "probably the more potent tool", which in turn goes back to market whispers over the weekend that nothing short of a $1+ trillion package will rescue the market.
Here are the key excerpts from his note:
... monetary policy is probably not particularly effective at the moment. Not only are lower borrowing costs unlikely to induce spending by people who are afraid of face-to-face interactions, but in addition, many central banks are already close to the effective lower bound on interest rates. Nevertheless, monetary policymakers will want to do what they can. Tuesday’s FOMC statement that the committee “will act as appropriate to support the economy” points to further easing at the March 17-18 FOMC meeting.
We now expect a 50bp cut, in part because the bond market is already priced for a large move and the FOMC will likely be reluctant to risk further tightening in financial conditions by refusing to deliver. We are also penciling in a final 50bp cut at the April 28-29 meeting.
Outside the US, we expect further easing from central banks including the ECB (10bp on rates plus increased QE purchases), the Bank of England (50bp), the Bank of Canada (another 75bp), and the Reserve Bank of Australia (another 25bp).
Fiscal policy is probably the more potent tool. Beyond funding for virus testing and treatment, the most direct avenue is aid to corporates and small businesses, especially in sectors hit by the virus shock. A US precedent is the post-9/11 help for the airline industry, which involved $5bn in direct payments and up to $10bn in loan guarantees. Another avenue—at least in the US where the central bank is very limited in what it can legally buy—is for the Treasury to backstop credit easing facilities for the Fed; however, it would probably take a material further deterioration in market conditions and functioning for such facilities to be reestablished.